The current domestic rally is robust and Sensex may breach the 80,000 mark. The surge began with the formation of a stable coalition government, giving confidence to investors. Since June 4, the major index has risen 10% and reversing net FII outflows (QTD) has significantly reduced the country’s risk profile.
India’s VIX index, which peaked at 26.75 on June 4, has since halved to 13.8, indicating a notable decline in market volatility. This positive trend has particularly benefited key sectors such as financials and consumer goods, with FIIs showing renewed interest after months of net selling in April and May.
The market rally is also supported by positive expectations for the upcoming budget, with optimism growing that the new government, focused on pro-growth policies, will expand on this agenda through various measures in the next fiscal year.
At the same time, governments are being called upon to balance growth with the interests of the masses. Given the widening income gap and changing public sentiment, these efforts are crucial to promoting prosperity for the masses, especially in rural areas and among the lower-middle class.
There have been signs of a slowdown in overall market momentum this week, with small and mid-cap stocks in particular experiencing consolidation due to premium valuations. Since June 4, large caps are up 10% while the broader market is up 11%, signaling a decline in small and mid-cap outperformance.
This underperformance is likely to continue in the near term following the rapid performance of the overall market which is up 16% YTD against 8% gains in the Nifty 50. There has also been profit taking due to concerns over delayed progress of monsoon and heatwave in North India impacting near term demand, but we believe this is a temporary issue.
At this peak, a sector rotation is evident from higher priced stocks to those considered value stocks. Fresh buying is seen in private banking, telecom, IT and consumer durables. Financials led the rally this week, while profit booking was evident in real estate, power, metals and midcaps.
Globally, sentiment is improving with the Bank of England’s interest rate cut becoming more likely in August. Similarly, in the US, rising jobless claims and weak housing data have raised expectations of a rate cut in September. Domestically, expected rationalisation of GST rates for sectors like textiles, fertiliser and banking is expected with the meeting scheduled for August. This is expected to drive sectoral movements in the near term.
The inclusion of Indian government bonds in the JP Morgan Emerging Market Bond Index is a significant move for the Indian economy with big implications in the long run. While the direct impact on the stock market may be limited, the move will strengthen the domestic economy and the local currency.
In the medium term, we expect interest rates to ease, discount rates and country risk to reduce, and earnings prospects to improve in the long term, which will be positive for equities. We also expect inflation to ease due to a slight appreciation and lower depreciation of the Indian rupee, which will reduce import costs and may also lead to a faster than expected interest rate cut by the Reserve Bank of India in the medium term.
To summarise, recent trends over the past one month have been broadly positive. The only concern is that valuations are high on expectations of low earnings growth in the low teens for FY25 and FY26, limiting super returns in the near term.
Well, revenue growth is at risk to the upside due to the increased GDP growth forecast as indicated by the Reserve Bank of India in its June policy, raising the possibility of further earnings growth in the coming quarters. Overall, the equity market is currently performing well with no obvious negative factors impeding its progress. India, in particular, has started to outperform the rest of the world which has underperformed so far this year.
Author Vinod Nair is Head of Research at Geojit Financial Services.
Disclaimer: The views and recommendations expressed above are those of the individual analysts, experts and brokerage firms and not those of Mint. We recommend that you check with a qualified professional before making any investment decisions.
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